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Why are we here? The median response indicated that the typical US organization loses 7% of its annual revenue to fraudulent activity. This percentage applied to the estimated 2008 GDP of $14.2 trillion would project that roughly $994 billion would be lost to fraud in 2008. Source: 2008 Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners

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Fraud Triangle OPPORTUNITY PRESSURE / INCENTIVESRATIONALIZATION  10% of employees will never steal  10% of employees will always steal  80% of employees will steal if given the right opportunity, motivation or justification

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What is the objective of an Audit? The expression of an opinion about whether your financial statements are fairly presented, in all material respects, in conformity with U.S. GAAP......not to detect fraud.  (According to the ACFE report to the nation, less than 10% of fraud is discovered by an External Audit)

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Limitations of an Audit Designed to obtain reasonable assurance, not absolute assurance about whether the financial statements are free from material misstatement (caused by error or fraud) Not designed to detect immaterial errors or fraud. Not designed to provide assurance about IC or identify deficiencies  However, SAS 112 requires written communication of those deficiencies the auditor becomes aware of

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Audit vs. Review vs. Compilation Compilation – lowest level of service – your account balances assembled into financial statement format Review – use of analysis as opposed to tracing to source documents  Reviews & Compilations do not contemplate obtaining an understanding of IC or the assessment of risk.  Reviews & Compilations cannot be relied upon to disclose errors, fraud or illegal acts that may exist.  No requirement to communicate IC deficiencies Agreed upon procedures – another option?

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SAS 112 – Definitions Control Deficiency  Exists when the design or operation of a control does not allow for prevention or detection of a misstatement on a timely basis Deficiency in design – a control is missing or not properly designed Deficiency in operation – when a properly designed control does not operate as designed or when the person performing the control doesn’t have the necessary authority or qualifications

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SAS 112 – Definitions (continued) Significant Deficiency  A control deficiency (or combination of control deficiencies) which result in a more than remote likelihood that a misstatement that is more than inconsequential ( magnitude ) will not be prevented or detected Material Weakness  A significant deficiency (or combination of significant deficiencies) that results in a more than remote likelihood that a material misstatement ( magnitude ) will not be prevented or detected

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SAS 112 Examples Management letter comment  Petty cash is not reconciled – likelihood of misstatement is more than remote; the magnitude would be inconsequential Significant Deficiency  Failure to perform monthly reconciliations of significant accounts in a timely manner (AR, AP) – likelihood is more than remote however other related procedures (bank statement review, budget vs. actual analysis etc.) would reduce the magnitude to less than material but more than inconsequential Material Weakness  Same individual receives the bank statement, prepares reconciliation and has check signing authority. There is no formal review of the bank reconciliations – likelihood is more than remote; magnitude could be material

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Fraud Examples “in the News” Payroll & Compensation  Fictitious employees: San Jose, CA – employee embezzled $11m from her employer by providing false payroll data to a processing company and forging signatures  People behave the way you pay them to behave Dominos – Driver ran red light speeding to make 30-minute delivery. Woman received $750k in actual damages & $78m in punitive damages. Commissions based on gross sales only (billing schemes)

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Fraud Examples “in the News” Lack of oversight  Portland, ME – partner in Verrill Dana, LLP was fired for stealing money from the firm and clients  Managed private trusts and bank accounts Over billed clients Stole money from private accounts Redirected funds to himself that should have gone to the firm Stole over $400k

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Fraud Examples “in the News” White-Collar Crime: “ Honest Person Turned Felon” (embezzled over $250,000)  CPA at local accounting firm in North Carolina  Handled Trusts and Retirement accounts for corporate and individual clients  Felt the need to “keep up with the Joneses” by spending money they didn’t have  “Poster boy for the Fraud Triangle”